Are Grants Considered Taxable Income?
Many people believe that grants, fellowships, and scholarships are free money for legitimate students and are not considered taxable income.
However, this is not always the case. Some financial assistance is taxable and some is not.
For instance, your financial aid will be tax free only if you use it for tuition, books, and other equipment that you may require in your course. If you use the financial aid money for paying your board or room then it will be considered taxable income.
If you use only part of your financial aid for eligible expenses (books, tuition, etc.) and the remaining for non-eligible expenses (room, board, etc.) then that part of money used for eligible expenses alone comes under the non-taxable income and you have to pay tax for the remaining sum.
Tax laws change all the time. It is best to check with your accountant or tax professional if you have questions, because the information on this page may be out of date by the time you read it. As a general rule, however, you cannot assume grants and scholarships are “tax free.”
If a student wants his/her scholarship to be considered as a non-taxable income then they must meet some eligibility requirements to make it as a qualified expense.
The most important requirement is the student must attend a degree program in an accredited institute. You can calculate the taxable portion of your school grant on your own. First sum up the total amount received from all the school grants like fellowships, grants, and scholarships.
Then you have to subtract the amount you spent for the qualified expenses alone. The remaining money comes under the taxable income.
Pell Grants are considered scholarships.
Therefore, it must also meet the qualifications to consider it as a non-taxable income. It holds true for all the grants, regardless of its need. On the other hand, payments received from the service academies as a cadet will not come under a scholarship or a fellowship.
It is considered as a personal income and therefore it is taxable. If you are not a degree candidate then the entire financial aid will be taxable. Only if you are degree candidate you can exclude it from your income while calculating your tax.
If you or your parents are currently working or previously worked in a school as an employee then you will be entitled to a reduced tuition.
This reduced tuition will not come under taxable income if it used for education that is below the graduate level. It becomes taxable if it received as a payment for the services you offered. Graduate students who perform research or teaching activities at any educational institution can benefit from the tax-free reduced tuition.
You should be a matriculated student for excluding your scholarship or grant from taxable income. Scholarship or grant comes under taxable income for non-degree students. Take a look on monderlaw.com website for more information.
Student loans will not come under the taxable income.
If your student loan is forgiven or canceled then the portion of debt that is forgiven comes under the taxable income. It is your responsibility to separate the non-taxable and taxable financial aid while filing the federal tax return. In case, if you receive a school grant that puts a condition for you to provide future services then that entire amount will come under taxable income.
This applies even if you are a degree candidate and if you use it for your educational expenses.
